The Meaning of Money • Money – Set of assets in an economy – That people regularly use – To buy goods and services from other people • The functions of money – Medium of exchange – Unit of account – Store of value 2 Intro Macro

The Meaning of Money • Medium of exchange – Item that buyers give to sellers • When they want to purchase goods and services • Unit of account – Yardstick people use to post prices and record debts • Store of value – Item that people can use to transfer purchasing power • From the present to the future 3 Intro Macro

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The Meaning of Money • Liquidity – Ease with which an asset can be converted into the economy’s medium of exchange • The kinds of money • Commodity money – Money that takes the form of a commodity with intrinsic value • Intrinsic value – Item would have value even if it were not used as money 4 Intro Macro

The Meaning of Money • The kinds of money • Fiat money – Money without intrinsic value – Used as money because of government decree • Money in the U.S. economy • Money stock – Quantity of money circulating in the economy 5 Intro Macro

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The Meaning of Money • Money in the U.S. economy • Currency – Paper bills and coins in the hands of the public • Demand deposits – Balances in bank accounts • Depositors can access on demand by writing a check • Measures of money stock – M1, M2 6 Intro Macro

Two measures of the money stock for U.S. economy 1 7 The two most widely followed measures of the money stock are M1 and M2. This figure shows the size of each measure in 2007

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Where is all the currency? • 2007: $759 billion of currency outstanding – Average adult: holds about $3,272 of currency – Much of the currency is held abroad – Much of the currency is held by drug dealers, tax evaders, and other criminals • Currency – not a particularly good way to hold wealth – Can be lost or stolen – Doesn’t earn interest Intro Macro 8

The Federal Reserve System • Federal Reserve (Fed) – The central bank of the United States • Central bank – Institution designed to • Oversee the banking system • Regulate the quantity of money in the economy 9 Intro Macro

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